Upping the ante: the equilibrium effects of unconditional grants to private schools

We test for financial constraints as a market failure in education by experimentally allocating unconditional cash grants to either one (L) or to all (H) private schools in a village. Enrollment increases in both treatment arms, but test scores, accompanied by fees, increase only in H. This pattern is consistent with a greater focus on infrastructure in L and teacher remuneration in H. It also follows from a canonical oligopoly model of capacity constraints with endogenous quality. Higher social surplus in H, but greater private returns in L underscores the role of competitive forces for the design of educational subsidies.